What an Equity Investment by the Gates Foundation Looks Like (Or, the Fun Stuff's in the Side Letter)

Xconomy reported yesterday that the Gates Foundation has made an equity investment in Liquidia Technologies, a North Carolina-based biotech startup.

A press release on the Gates Foundation site explains that equity investments are part of the financial tool kit used to effect improvements in global health:

"The Bill & Melinda Gates Foundation made this equity investment in Liquidia as part of an initiative that commits $400 million in program-related investments (PRIs) to deepen the impact of the foundation’s work. These include the use of financial tools, such as low-interest loans, loan guarantees, and equity investments to secure financing for activities of select organizations that fall within its focus areas.

"'Funding innovation is a key to addressing the unmet health needs of the world’s poorest people,' said Doug Holtzman, Deputy Director, for the infectious diseases team at the Bill & Melinda Gates Foundation. 'This unique investment partnership will help us advance vaccine development as part of our commitment to help research, develop and deliver vaccines for the world’s poorest countries.'"

Emphasis added.

The Xconomy article, written by Luke Timmerman, says that the Gates Foundation has a hedge: "the ability to 'disengage' from Liquidia if it is unhappy with the direction of the program."

What does "disengagement" look like?

I went to Liqudia's Amended and Restated Certificate of Incorporation to try to find out.

Here's the most I can reasonably infer: "disengagement" must be some kind of right to put the stock back, either to the company or possibly to other investors.

The terms of that put right - what would trigger it, who would fund it - are not in the charter. But there is a telling reference in the protective provisions, calling out that the normal requirement of a vote of the Senior Preferred to approve stock redemptions "shall not apply to the repurchase of shares of Preferred Stock or Common Stock pursuant to that certain Global Access Rights Letter Agreement dated on or about the Filing Date."

I haven't seen the "Global Access Rights Letter Agreement," so I can only infer from that title, the Foundation press release, and the Xconomy article that the letter agreement incentivizes Liquidia to make its technology available in needed areas on some reasonable basis.

Here are some additional inferences from the Liquidia charter about the Gates Foundation investment:

The Gates Foundation controls what is technically a separate class of preferred stock, Series C-1. However, it appears that the Series C-1 is designed to pair with the Series C for most purposes.

That said, one of the purposes served by splitting the Series C-1 from the Series C is to enable a shifting to the VCs of the right - and the responsibility - to elect certain directors. Two board seats are designated to the Series C only, excluding the Series C-1. Presumably the Foundation wants to stay as far away as possible from responsibilities to other shareholders.

A total of $14 million worth of Series C-1 is authorized, although the Gates Foundation press release and the Xconomy article report that the Foundation's investment was $10 million. The $10 million figure is supported by a Reg D filing.

The Series C investors, according to the Foundation press release, include Canaan Partners, NEA, PPD, Morningside Group, Pappas Ventures and Firelake Capital. These VCs hold about 71% of the issued and outstanding "Senior Preferred" of Liquidia (defined to mean the Series C and the Series C-1, which again for most purposes act as a single class).

If we assume that somehow or eventually the Gates Foundation were issued all shares of Series C-1 that are authorized, then the Foundation would own just over 1/3 of the Senior Preferred, and perhaps around 18% of the company on a fully diluted, as-converted basis.